Report Suggests Cash Balance Plan Would Benefit Ill. Teachers

August 1, 2014 (PLANSPONSOR.com) – An alternative plan design, such as a cash balance plan that would allow participants to earn future benefits gradually throughout their careers could generate larger pensions for many Illinois teachers, the Urban Institute suggests.

In
a report, the institute says relatively few teachers gain much from Illinois’ existing
pension plan because benefits are accrued late into the career. Among teachers
hired at relatively young ages, members of the tier-1 plan must work at least
30 years to receive pensions worth substantially more than their own required
contributions, and tier-2 members must work at least 40 years.

The
institute simulated future pension benefits for newly hired Illinois public
school teachers in a cash balance plan similar to one proposed in the state
senate and found 72% of newly hired public school teachers, including 56% of
those who complete at least five years of service, would earn larger pensions,
net of their contributions, in a cash balance plan compared to the tier-1 plan,
even though the two plans would impose similar costs on taxpayers.

In
its report, the Urban Institute notes that cash balance plans have similarities
to 401(k) plans, but assets are pooled and professionally managed, and plans often
guarantee some minimum investment return. The account balance may continue to
increase with investment returns after employees separate from service, so those
who separate early may accumulate substantial savings by the time they reach retirement
age. By contrast, in the existing Illinois teachers pension system, retirement
benefits are frozen when teachers separate, so inflation and lost interest erode
their values while teachers wait to collect. In addition, cash balance plans
allow participants to collect their benefits as lifetime annuities instead of
having to purchase them from private insurance companies that may offer
unfavorable rates.

According
to the report, Illinois State Senator Daniel Biss introduced a bill in 2012 to create a cash balance plan for state employees, including public school
teachers. Under his proposal, teachers and school districts would each contribute
the same share of teachers’ salaries to the plan. Account balances would
receive interest credits equal to the actual state return on investments, but
no less than 5% and no more than 10% in any year. Both employee and employer
contributions would vest immediately. Upon separation, teachers could immediately
withdraw their balances, or they could keep their funds in the plan and receive
an actuarially fair, lifetime annuity beginning at age 67. The annuity would be
computed using a 5% interest rate and provide the same cost-of-living
adjustment (COLA) as the tier-2 plan. Those who leave state employment before
age 67 and choose to keep their balances in the plan would earn 5% interest each
year until they begin collecting their annuities.

The Urban Institute’s
report, “Evaluating Retirement Income Security for Illinois Public School
Teachers,” is here.

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